Why ETF put buying might mean one of two bullish things

Indicator of the Week: Why Doesn't the Market Like Mondays?
By Rocky White, Senior Quantitative Analyst

Foreword: Everyone dreads Monday, and that's especially true for investors. The underperformance of Monday has recently garnered some attention. From June through July, the Dow Jones Industrial Average (DJIA - 13,157.97) saw nine straight negative Mondays. This underperformance, however, has been going on for some time. On the chart below, the red line shows the return for the Dow since 2011. The green line shows what the return for the Dow would be if we could just get rid of Mondays. As you can see, the Dow would be up more than 20% without Monday, compared to about 13% as it is.

Monday Performance: The tables below summarize the Dow returns in 2011 and 2012 by day of the week. In 2011, Monday was the only day that saw more negative days than positive days, and it averaged a loss of 0.07%. This year so far, Mondays have been abysmal, averaging a loss of 0.10% and being positive only a third of the time.

To put the 33% positive figure into perspective, this is the worst return for any single weekday since 1984, when Wednesdays were positive just 31% of the time. It's also the worst figure for a Monday since 1973.

Bucking the Trend: Though the Dow has done horribly on Monday, there are individual stocks that have actually done quite well on the first day of the week. Below are the stocks that have had the highest percentage of positive Mondays. SBA Communications Corp. (SBAC) tops the list with 22 of 30 positive Mondays so far in 2012. The bigger-cap names on the list are Apple (AAPL), Vodafone Group (VOD), AT&T (T), BP plc (BP) and Verizon Communications (VZ). What this exactly means for those companies ... I'm not sure. But it's interesting, nonetheless.

This Week's Key Events: A GDP Update, and a Look at the Beige Book
Schaeffer's Editorial Staff

Here is a brief list of some key market events scheduled for the upcoming week. All earnings dates listed below are tentative and subject to change. Please check with each company's respective website for official reporting dates.

Monday

The week kicks off on Monday with the Dallas Fed's manufacturing index. Meanwhile, Tiffany & Co. (TIF) is due to report quarterly earnings.

Tuesday

Tuesday features the S&P/Case-Shiller home price index, the Conference Board's latest consumer confidence report, the Richmond Fed's manufacturing index, and the State Street investor confidence reading. Companies stepping into the earnings confessional include Brown Shoe (BWS) and Sanderson Farms (SAFM).

The week concludes on Friday with the Chicago purchasing managers index (PMI), factory orders, and the final estimate of the Thomson Reuters/University of Michigan consumer sentiment index for August. Frontline (FRO) will wrap up the week's slate of quarterly earnings.

And now a few sectors of note...

Dissecting The Sectors

Sector

Leisure/Retail Bullish

Outlook: Retail sales rose in July for the first month in four, rising 0.8% and surprising analysts, who projected a more modest 0.3% advance. The core index, meanwhile, rose 0.9%, which could be a sign that consumer spending may be headed higher. In recent months, we've observed a pattern of slight dips on poor macroeconomic news, and large advances on encouraging macro developments -- pointing to an appealing risk/reward set-up for the retail group in particular. Against this backdrop, the SPDR S&P Retail ETF (XRT) continues to hover above the $60 level, which previously acted as resistance, but now may provide support. Not only is this round-number level roughly quadruple the security's November 2008 low of $14.81, but it is near the 32-day moving average, which could help bolster support in this region. A recent hedge-fund report from FactSet observed that the top-50 hedge funds collectively reduced their exposure to the Consumer Discretionary sector in the second quarter. Relative to the S&P 500 Index (SPX), though, they remain heavily overexposed to the group. Specifically, consumer discretionary names represent 19.1% of hedge fund holdings but just 11% of the SPX (as of June 30). Drilling down to specific equities, we like a number of names that have had positive reactions to earnings and/or same-store sales numbers. Among the companies we are watching with a bullish eye are Under Armour (UA), Expedia (EXPE), The Gap (GPS), Dillard's (DDS), Brinker International (EAT), Fossil (FOSL), Green Mountain Coffee Roasters (GMCR), Michael Kors (KORS), Estee Lauder (EL), Abercrombie & Fitch (ANF), and Ann Taylor (ANN). Contrarian investors should continue to look for scenarios where outperforming retail stocks remain underappreciated by the crowd. Given the aforementioned overexposure on the part of hedge funds, however, we would suggest avoiding the "favored" stocks in this group that have suffered poor price action. One example of this phenomenon is Sears Holdings Corporation (SHLD), which is among the top-50 holdings at these prominent hedge funds, despite dropping more than 30% from its March peak.

Sector

Homebuilding Bullish

Outlook:Despite mixed news on the numbers front, the homebuilding sector continues to handily outperform the broader market. During the past week, existing home sales fell short of expectations, while new home sales managed to surprise to the upside. Nevertheless, as mortgage rates remain near record lows, interest in the real estate market has continued to expand. As the recovery from a years-long housing slump chugs along, homebuilding stocks stand to benefit. Turning to the charts, the SPDR S&P Homebuilders ETF (XHB) hit yet another new multi-year high on Aug. 24, surging further above the $23 level. Meanwhile, the 20-day buy-to-open put/call volume ratio on this ETF -- according to data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) -- stands at 5.53. In other words, 553 puts are being purchased for every 100 calls. During the same time period, the XHB has gained more than 7%. We saw a similar pop in this ratio in February, when the ETF ultimately rallied for about three months before pulling back. This bearish speculation could be the result of hedge funds using these puts to hedge long stock positions they have been accumulating. As noted in last week's commentary, hedging is a bargain on this ETF of late, as implied volatility is at relatively low levels. Individual investors may also consider this approach if holding long stock in individual homebuilding issues. Some of our preferred names in the group include PulteGroup (PHM), D.R. Horton (DHI), Toll Brothers (TOL), Lennar (LEN), and Meritage Homes (MTH), due to a combination of solid price action and lingering skepticism from Wall Street. This past week, TOL reported a 46% rise in third-quarter earnings, prompting a number of price-target hikes on Wall Street and a move to a new five-year high on Aug. 22. Going forward, all of these technically strong names in the sector could enjoy additional upside spurred by short-covering support or further analyst upgrades.

Sector

GoldBearish

Outlook: Despite the recent endorsement of "celebrity" investors such as John Paulson and George Soros, gold hasn't been able to muster a convincing rally. Although the SPDR Gold Trust ETF (GLD) has collected recent gains, the fund is still down about 6% on a year-over-year basis. On a technical basis, the GLD has broken above its 140-day and 320-day moving averages -- a risk to the bearish case -- but there is still work to be done. A descending trendline connecting the September 2011 high and March 2012 low remains perched immediately overhead. Meanwhile, a longer-term trendline -- joining various higher lows since 2009 -- is also blocking the security's upward path. On the options front, the 20-day buy-to-open call/put volume ratio is hovering near a three-year high. Optimism is therefore palpable ahead of critical macro events such as the Fed retreat in Jackson Hole, Wyo. -- featuring remarks from Fed Chairman Ben Bernanke and European Central Bank (ECB) President Mario Draghi -- and the ECB's next policy meeting on Sept. 6. Overall, buy-to-open option volume on the security remains lackluster, however, which has had bearish implications for the GLD in the past. In fact, during the past several years, the ETF has languished whenever option volume has been historically low or in declining mode. An increase in this volume would indicate growing interest in the yellow metal, whether on the part of speculators betting on an advance or hedgers using GLD puts to hedge long futures positions. We plan on watching this indicator closely in the days and weeks ahead for signs of a bottom to determine if GLD's recent move higher was merely a blip, or a true reversal in trend.

Prepare for the investing week ahead. Every week, Bernie Schaeffer and his staff provide you with their insight about what has happened and, more importantly, what will happen in the market. We dig deep and show you what's happening behind the scenes, and tell you which indicators are predicting major market moves. If you enjoyed this week's edition of Monday Morning Outlook, sign up here for free weekly delivery straight to your inbox.

If you tend to view the glass as "half full" instead of "half empty," you should be encouraged by last week's holiday-shortened, expiration-week price action. The S&P 500 Index (SPX - 2,110.30), after breaking out above resistance around 2,060 earlier this month, took a breather around the round 2,100 level -- as we suggested in last week's report could occur, especially with other key benchmarks trading around respective round numbers, too. The optimist would note that an immediate sell-off did not occur, as the index went sideways, with Friday's lows of the week occurring at the uptrending 10-day moving average (currently located at 2,083.26).

For the first time in 2015, the S&P 500 Index (SPX - 2,096.99) experienced two consecutive closes above 2,058.90, its 2014 close. As we have pointed out in past discussions, this level has been worth keeping an eye on -- up until last week, a close at or just above this year-to-date (YTD) breakeven level was immediately met with selling. In fact, notching that second consecutive daily close in the green for 2015 wasn't an easy task for the SPX, as an intraday pullback from its highs was supported right at this YTD breakeven.

The technical scenario that we presented in our Feb. 2 report played out last week with respect to the S&P 500 Index (SPX - 2,055.47) breaking below the 2,000 level, setting up an intraday decline to the lowest levels of 2015. However, longer-term support came into play in the 1,985 region -- around the index's 10-month moving average -- from which a furious rally began, proving once again the significance of this trendline.